Executive Summary
Economic policies reacted in a timely manner to the crisis, but the recovery will pick up from the second half of 2021.
The pandemic has hit the society and economy hard (Figure 1). The large economic contraction of 10.8% in 2020 reflects strict containment measures, but also structural features that made the Spanish economy more vulnerable. These include the importance of tourism, high prevalence of small and medium sized enterprises and the widespread use of temporary contracts.
Source: OECD Economic Outlook (database).
The government support of around 20% of GDP (including guarantees and indirect measures) mitigated the negative impact of the crisis. The increase in unemployment was cushioned by the short-time work scheme, reaching 23% of salaried workers at the peak of the crisis. Around 90% of the available loan guarantees were utilised in March 2021.
Uncertainty regarding the outlook is very high. GDP is projected to rebound from the second half of 2021, as the gradual deployment of vaccines enables the release of pent-up demand, tourism gradually recovers and the national recovery plan supports activity (Table 1). While domestic demand can be stronger than expected, a potential increase in insolvencies once policy support is phased out poses a strong downward risk and may increase non-performing loans.
Policy support should be pursued until the recovery is firmly underway, but become more targeted. Accommodative ECB policy and the extensions of the terms of the loan guarantees continue to support firm liquidity. The recently announced direct aid to firms, which suffer from financial difficulties solely due to COVID-19, but are likely to return to profitability in the future, should be executed swiftly. Speedy restructuring of viable firms in temporary distress can prevent their unwarranted liquidation, and should be facilitated out of courts to avoid lengthy proceedings. Elements of the current labour market regulation, such as priority of firm-level agreements, which enable firms to rapidly adapt to changing conditions, will also be crucial to support the recovery.
The crisis has exacerbated pre-existing challenges. Addressing structural issues in labour markets can help lower inequalities, which were already high before the pandemic (Figure 2), and contain medium-term fiscal challenges.
The use of Next Generation EU funds should prioritise reforms that enhance long-term growth. Swift absorption of the funds can also support the near-term recovery. A governance system including different levels of government has been put in place. Continued efforts will be required to tackle potential implementation challenges.
The pandemic hit disproportionately hard young, low-skilled, and temporary workers (Figure 3). Improving the efficiency of active labour market policies will be an important tool to reskill and enhance the employability of displaced workers. The use of tools for the profiling of specific individual needs can allow interventions at an earlier stage, and tailor services more closely to individuals. Ensuring training opportunities for workers on short-time work schemes is also key to facilitate reallocation needs that might arise.
Source: Ministry of Inclusion, Social Security, and Migration.
The widespread use of temporary contracts increases inequality and in-work poverty. While temporary employment can help impacted sectors in the near term, labour market duality should be lowered in the medium-term. Hiring incentives should be targeted to most vulnerable groups for limited periods and their links to training programmes should be strengthened to provide a stepping stone to more permanent jobs. The menu of contracts firms can choose from should be simplified, while clarifying conditions under which temporary contracts can be used, such as for training or seasonal jobs.
The effects of rapid and large increases in the minimum wage on employment, especially of the youth and the low-skilled, should be evaluated. The process of setting minimum wages could be revised to include a permanent and independent Commission, mandated to evaluate its potential impact and provide recommendations to allow gradual changes in the minimum wage in line with changing labour market conditions and productivity.
In the context of a weakened economy, fiscal consolidation should only be gradual not to derail the recovery. Nevertheless, to bring credibility to fiscal sustainability, given the high level of public debt, a medium-term fiscal consolidation strategy, including all levels of government, should be announced, once the recovery is firmly underway.
The composition and efficiency of public spending can be improved to create space for higher public investment in the medium term. Despite the need to reprioritise expenditures, the use of spending reviews is limited. Lack of policy evaluation, including in sub-national levels of government, can be a barrier to a shift in expenditures to more productive uses.
Fiscal challenges will be exacerbated by the doubling of the old-age dependency ratio by 2050. Adequate and socially acceptable measures should be taken to ensure the long-term financial sustainability of the pension system. For example, the retirement age could be linked to life expectancy. Effective retirement age can be further increased by disincentivising early retirement and introducing new incentives to extend working lives, for example by increasing the number of required contribution periods to gain a full pension, and should be accompanied by measures to re-skill older workers.
There is room to improve environmental taxation to generate energy savings and increase tax revenues. The tax rate on fuels in non-ETS sectors is low in international perspective. Once the economy is on a clear recovery path, taxation of fuels should be increased to better reflect emissions of CO2. This should be accompanied by redistribution towards poorer households.
Spain is improving on digitalisation, but there is room to improve the uptake and use of digital technologies, and information and communication (ICT) skills.
The adoption rate of digital technologies by firms is close to the OECD average, but is below the best performing countries (Figure 4). Furthermore, the use of such technologies to introduce new business processes or products, which would boost productivity, has been limited. Enhancing digital diffusion requires addressing remaining gaps in digital infrastructure and enhancing capabilities of firms and people to take full advantage of digitalisation via higher investment in intangible assets and skills.
Digital services by public administration are fairly developed, but could be improved further. For example, the provision of e-procurement by regional contracting authorities could be reinforced by the full roll-out of the National Plan for Digitalisation of Public Administration.
Promoting digital diffusion across the country by developing digital infrastructures further is key. Overall, communication infrastructure is well-developed, notably high-quality broadband, such as fibre networks. However, there is a large difference in access between urban and rural areas. Barriers to “rights of way” – permission to install necessary equipment – are high in some regions and municipalities, and should be reduced to lower deployment costs.
Research and development (R&D) raises the ability of firms to introduce new business processes or products, but business R&D investment remains low. Partnerships between firms and research institutes can be an effective tool to spur innovation by sharing risks and rewards of digital innovation. The role of Technology Centres, among which there are regional institutions to support innovation, can be enhanced to increase cooperation between research institutes and SMEs, which need to innovate and use digital technologies more.
Addressing key bottlenecks, such as people’s ICT skills, through education policies at every level, would enable the use of digital technologies and boost productivity growth. This would help in particular low productivity firms and low-skilled people, making the benefits of digitalisation shared by all.
The relevance and targeting of on-the-job training can be improved to upskill workers. The provision of relevant training in line with current and future labour market needs of firms, especially SMEs, is a major challenge. Targeted training to those with lower digital skills, such as low-skilled and older workers, is key. Public job training programmes concentrating on these workers and skills should be developed. In addition, financial incentives for lifelong training should be at least partially shifted to training programmes chosen by individuals from employer-based ones, which could promote the training of low-skilled workers.